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The government’s proposal to link private pension liabilities to the Consumer Price Index is under scrutiny from pension schemes and their advisers, and the impact of any change remains unclear – but industry experts expect it to be next year before substantial changes roll through.

The latest high-profile names to draw attention to the implications of the proposal include Joe Moody, head of liability-driven investing at State Street Global Advisors, and Fidelity fund manager Andy Weir.

The change, to linking pension liabilities to CPI instead of RPI – which include house prices – is expected to reduce pension schemes’ deficits substantially. But the practicalities could take months, if not years, to work out fully. The government’s proposals have yet to be explained in detail, and there is currently no market for CPI-linked bonds or derivatives.

Moody expects preliminary estimates on the costs to pensioners, and the benefits to corporate sponsors, to be published within weeks, once lawyers have trawled through their schemes’ documentation to work out how the change will affect them.

Andy Weir, the manager of Fidelity International’s global inflation-linked bond fund, said the proposals could have implications on investors in the bond markets today: "The changes will affect the market in instruments used to match inflation-linked liabilities. In the UK, the vast majority of today’s inflation-linked gilts, inflation-linked corporate bonds and inflation derivatives (such as inflation swaps) are RPI-linked. The changes to indexation will increase the uncertainty over the future of these RPI-linked instruments and may deter marginal buyers.”

He added that the market for CPI-linked gilts and inflation swaps could take months even to get going: “The index-linked market is already quite complex. The Debt Management Office, which issues gilts, will not want to rush through the implementation of any new instrument that could further complicate the market without a lengthy consultation period. This means CPI-linked gilts will probably be issued no earlier than the start of the next fiscal year in April 2011."

If the Debt Management Office takes time to issue new gilts, it would in turn delay the development of a derivatives market focusing on CPI, according to Moody. He said a derivatives market – necessary for many LDI strategies – would be “very unlikely” to develop before the DMO starts issuing such debt.

He said: “If you want to buy CPI-linked debt, you have to realise that the derivatives market won’t develop until the DMO starts issuing it. The question then is who will buy it - initially the debt may not be very liquid. Another factor is whether companies, such as the utilities, who link their debt to RPI might shift it to CPI. There is likely to be a dual market with debt linked to RPI and CPI.”

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Of course, even before pension schemes get as far as demanding such debt, they may face opposition from pensioners who want to keep their benefits linked to RPI. Right now, pensions lawyers will have their hands full.

Financial News has reported on the immediate questions for pension schemes and their advisers here http://bit.ly/aoIcds.